A look at the main macroeconomic objectives (economic growth, inflation and unemployment, government borrowing) and possible conflicts between these different macro-economic objectives. The main macro-economic objectives Economic growth – positive and sustainable growth (The UK, long-run trend rate is around 2.5%) Low inflation (UK target 2% +/-1) – Low unemployment / Full employment (e.g. around …
Readers Question: Could you give a summary of Keynesian and Classical views? Summary Classical economics emphasises the fact that free markets lead to an efficient outcome and are self-regulating. In macroeconomics, classical economics assumes the long run aggregate supply curve is inelastic; therefore any deviation from full employment will only be temporary. The Classical model …
Subsidies involve the government paying part of the cost to the firm; this reduces the price of the good and should encourage more consumption. A subsidy shifts the supply curve to the right and can be justified for goods which offer benefits to the rest of society. What is the justification for subsidising goods with …
Economic growth is an increase in real GDP; it means an increase in the value of goods and services produced in an economy. The rate of economic growth is the annual percentage increase in real GDP. There are several factors affecting economic growth, but it is helpful to split them up into: Demand-side factors (e.g. …
Perfect competition is a market structure where many firms offer a homogeneous product. Because there is freedom of entry and exit and perfect information, firms will make normal profits and prices will be kept low by competitive pressures. Features of perfect competition Many firms. Freedom of entry and exit; this will require low sunk costs. …
What policies can a government use to reduce pollution? Pollution is a negative externality – a cost to society. To reduce pollution, the government can use four main policies – tax to raise the price, subsidise alternatives, regulations to ban certain pollutants and pollution permits. Government policies to reduce pollution Tax. e.g. Carbon tax, which …
The NAIRU and Natural rate of unemployment are similar concepts – they both reflect the level of structural unemployment when the economy is close to full employment. However, they have different compositions and can vary in the short term. NAIRU – Non-accelerating Inflation rate of Unemployment. This is the level of unemployment that is consistent …
Readers Question: What is the difference between short run aggregate supply (SRAS) and Long run aggregate supply (LRAS)? Essentially, the SRAS assumes that the level of capital is fixed. (i.e. in the short run you can’t build a new factory) However, in the short run you can increase the utilisation of existing factors of production, …